USD creeps back higher

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  The greenback edged back higher after pushing toward support in several pairs this week, keeping us all guessing on its next move. Trade deal hopes are having a hard time sustaining strong risk sentiment as the drumbeat of weak economic growth grows louder.


The buoyancy in risk appetite has faded a bit as sour notes continue to sound from economic data releases. The latest was yesterday’s extreme negative surprise from the February US Philly Fed survey, which David Rosenberg pointed out registered its lowest reading since May 2016 and its worst drop in the New Orders component since 2008. This follows a very weak February flash survey from Germany this week and Japan’s Nikkei PMI dropped below 50 to a reading of 48.5 (and exports in January down over 8% year-on-year).

US core durable goods orders were also weak in December as were US existing home sales in January, an obvious sign that the interest rate sensitive sectors in the US continue to weaken after last year’s notable spike in bond yields.

A volatile couple of sessions have buffeted AUD, with a strong jobs data pumping price action higher before the news of a ban on coal imports from Australia at the Dalian port and reports of considerable delays in processing shipments spiked that move and took the Aussie sharply back lower. Apparently, the northern Chinese port of Dalian is not a major destination for coal shipments, perhaps taking the edge off worries that this move will impact the volume of shipments, but the move still suggests that China is applying a diplomatic pressure tactic. And coal is an important product for Australia, representing some one-fifth of the country’s exports.

The latest string of headlines has raised hopes on a friendly US-China trade deal all week, but by the time this deal rolls in, we wonder if the market will even be able to muster a reaction, given how far the bounce in sentiment has taken us from the late December lows and the drumbeat of troubling economic news. The US president will meet with China’s top trade representative Liu He today in Washington.

In the UK, prime minister May may look to avoid the parliament taking control of the Brexit endgame next week by seeking a three-month delay to Article 50. Collective groans all around.

Trading interest

New interest today in shorting the commodity dollars versus the US dollar on the latest move – starting with AUDUSD and NZDUSD, though we’re not fans of positioning fully ahead of the weekend, so perhaps half a position now and looking to add on Monday.
Also interest in AUDNZD longs if the pair manages to fully reverse above 1.0500, a solid technical signal that the latest episode below the prior range lows, already wobbling, is getting fully rejected.

Note: the European Central Bank’s Draghi will be out speaking later today, and very late we have the Fed’s Clarida (board of governors and voter) and Bullard (voter) speaking. The Fed’s most full-throated dove Bullard (also a voter this year) will be discussing the hot-button topic of the Fed’s balance sheet – could be  awkward timing for this market to get a signal in the dying hours of this week’s trading.

Chart: AUDUSD

Yesterday’s bearish candlestick sets up fresh downside focus, but we need to take out the local range lows into 0.7060 and really the 0.7000 mark for signs that any USD pair within the G10 is capable of trending after an excruciating bout of choppy range trading, and doing so possibly before we see US-China trade deal take shape.
Source: Saxo Bank
The G-10 rundown

USD – the greenback pulls back higher, but trading ranges remain profoundly uninspiring at the moment. Most interesting development in US markets the steep sell-off in long treasuries – all other things equal looks USD supportive against JPY and CHF. Some $80 billion of 2-year and 5-year US treasuries to be auctioned on Monday, and a 7-year auction to follow Tuesday.

EUR – what to like? Still, given recent trading themes, the euro may actually outperform the more risk-sentiment linked currencies (note the EURAUD and EURNZD price action recently) if risk sentiment rolls over again.

JPY – focusing mostly on long US treasuries as a possible driver for USDJPY strength, given the size of yesterday’s sell-off. Could be a dynamic week next week for US rates as heavy supply from US Treasury auctions hits the market early next week.

GBP – no, please no – May reported to pursue an Article 50 delay – we had hoped that the odds of this were fading.

CHF – we have thoroughly lost interest here in EURCHF, though USDCHF interest for more upside could pick up if US long rates continue to rise.

AUD – the Aussie still looks heavy after the coal import news (more above) and we’ll see if the downside can pick up momentum next week despite the profoundly positive hopes for a friendly US-China trade deal and China maintaining a strong bid under its currency.

CAD – USDCAD bounced back higher from the key 1.3150-1.3200 pivot zone and could be set to extend that bounce if risk sentiment continues to sour broadly and especially if Canada’s December retail sales report today sours worse than the -0.3% expected.

NZD – we have cast about for a catalyst for selling the overvalued kiwi and may have found one overnight as the Reserve Bank of New Zealand threatened the need to cut the policy rate if a proposal to raise Tier 1 capital requirements is implemented . A close above about 1.0500 in AUDNZD a catalyst for long positions there and NZDUSD looks like it is rolling over again, assuming any USD pair is capable of trending again.

SEK – the krona remaining friendless and running out of range in EURSEK while mulling those 16-year highs in USDSEK. A roll over in risk appetite to the negative side could aggravate the krona’s slide.

NOK – EURNOK bears under pressure here if the price action remains bottled up above 9.70, especially if the long bout of price action in energy markets roll over.

Upcoming Economic Calendar Highlights (all times GMT)

0700 – Germany Q4 GDP Revision
0730 – Sweden Riksbank’s Ingves to speak
0900 – Germany Feb. IFO Survey
1000 – Euro Zone Jan. Final CPI 
1315 – US Fed’s Bostic (non Voter) to speak
1330 – Canada Dec. Retail Sales 
1530 – ECB’s Draghi to speak 
1700 – US Fed’s Clarida (Voter) to speak
1830 – US Fed’s Bullard to Speak on Balance Sheet
 
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